The Next Big Emerging Markets?

By Frank Holmes
CEO and Chief Investment Officer

When countries get grouped together for economic or political purposes, an acronym or other shorthand device is soon to follow. OPEC, EU and G7 are a few of the old standards, while G20, PIIGS (European nations with dangerously large sovereign debt burdens), and of course BRICs are newer examples.
Now The Economist is getting into the game with “CIVETS.”

This venerable magazine is not reinventing itself as a British version of National Geographic we’re not talking about the civets that prowl the treetops in the tropical forests of Africa and Asia.

CIVETS in this case refers to Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa six countries that could be the next wave of emerging markets stardom.

The Economist’s basic case: these six have large and young populations, diversified economies, relative political stability and decent financial systems. In addition, they are for the most part unhampered by high inflation, trade imbalances or sovereign debt bombs.

We didn’t think up the acronym, but we have liked the long-term prospects for most of these countries for quite a while. Here are some of our thoughts and observations.

Start with Colombia, which has had a hard time getting people to forget about its narcoterrorism past and look at its pro-business government policies.
I met with former President Alvaro Uribe and it was fascinating to observe his policies for social stability and job creation. Five years ago, he changed the rules and began to encourage companies to come in and help develop their oil resources. He has taken those petrodollars created and reinvested them back in the country’s infrastructure and created jobs.

That is in complete contrast to what Hugo Chavez is doing in Venezuela, or even Mexico and its energy policy. Both of those countries are watching their reserves deplete, but there’s no policy to bring in intellectual capital like you’re seeing in Colombia.

2010 Performance Indicators
Population (m) GDP per head
(US$, PPP) Consumer
price inflation (%, av) Budget balance
(% of GDP) Source: Economist Intelligence Unit, Country Data

Colombia 46.9 8,920 2.6 -3.9 Indonesia 243.0 4,230 5.1 -2.2 Vietnam 87.8 3,150 9.3 -7.7 Egypt 84.7 5,910 11.8 -8.7 Turkey 73.3 12,740 8.7 -4.5 South Africa 49.1 10,730 5.8 -6.3 Turkey’s economy is dynamic and currently supported by strong underlying trends that point to long-term growth ahead. Its economy is the sixth largest in Europe and in the top 20 worldwide with a 2009 GDP of $615 billion.

According to a 2009 International Monetary Fund (IMF) report, Turkey’s per capita GDP of just over $8,700 is greater than any of the BRICs. Industrial output leaped by 21 percent in the 12 months ending March 2010, inflation fell to 6.1 percent last year from double-digit levels a year before, and public debt is less than 40 percent of GDP.

And while Europe still makes up more than half of Turkey’s exports, the current government has taken steps to increase exports to Middle East trading partners Saudi Arabia, Iraq and Egypt, for instance as a hedge against any economic volatility in Europe.

Indonesia’s demographics, natural resources and relatively stable political environment have set up the country for what could be a very strong decade of growth. Its economy doubled in the past five years and in greater Jakarta—the world’s second-largest urban area with roughly 23 million people—GDP per capita grew by 11 percent each year from 2006 through 2009.

More importantly, this growth was driven by the private sector, not by government spending the private sector accounts for roughly 90 percent of the country’s GDP. Over the past five years, the average income has doubled to $2,350 a year and Deutsche Bank thinks that figure can rise another 50 percent by the end of next year.

Despite this income growth, Indonesia still has the lowest unit labor costs in the Asia-Pacific region, according to JP Morgan. This has attracted manufacturing activities from China. Employment growth is key because half of Indonesia’s population is 25 years old or younger, so the workforce as a portion of total population will rise over the next 20 years. This should increase the country’s consumption levels and fuel further economic growth.

Vietnam has seen rapid economic growth in recent years. It too has picked up some manufacturing base that was formerly in China. The country’s per-capita income of $1,050 last year was nearly fivefold higher than it was in the mid 1990s, and in Hanoi, the income level is closing in on $2,000 per person, according to government figures.

That new wealth is showing up in gold purchases. Net retail gold investment in Vietnam exceeded 500,000 ounces during the first quarter of 2010, up 36 percent year-over-year, the World Gold Council says. Add to that a 20 percent increase in gold jewelry demand.

Beyond the CIVETS, we see some potential in other places. Malaysia’s economy, for instance, grew more than 10 percent in the first quarter of 2010, and the country has plans to slash its budget deficit and at the same time invest more heavily in infrastructure. And in Chile, despite February’s earthquake, public debt is just 7 percent of GDP and the economy is expected to 5.5 percent growth this year and 6.5 percent in 2011 as resource exports to emerging markets in Asia accelerate.

We see the global growth story led by key emerging market countries like the BRICs, the CIVETS and others as the most powerful long-term investment opportunity.

For more on this theme, I invite you to visit our website to read through the “Frank Talk” blog for a look at our interactive “What’s Driving Emerging Markets” presentation.

Index Summary

The major market indices were mixed this week. The Dow Jones Industrial Index rose 0.40 percent. The S&P 500 Stock Index lost 0.10 percent, while the Nasdaq Composite finished 0.65 percent lower.
Barra Growth underperformed Barra Value as Barra Value finished 0.36 percent higher while Barra Growth declined 0.56 percent. The Russell 2000 closed the week with a gain of 0.04 percent.
The Hang Seng Composite finished higher by 1.00 percent; Taiwan was down 0.01 percent and the Kospi advanced 0.07 percent.
The 10-year Treasury bond yield closed at 2.91 percent, down 9 basis points for the week.
All American Equity Fund – GBTFX • Holmes Growth Fund – ACBGX • Global MegaTrends Fund – MEGAX

Domestic Equity Market

The chart shows the performance of each sector in the S&P 500 index for the week. Five sectors gained and five declined. The best-performing sector was telecom services, up 1.7 percent. Other better-performing sectors included financials and industrials. The three worst-performing sectors were technology, consumer staples, and consumer utilities.

Within the telecom services sector the best-performing stock was Verizon Communications Inc, up 4 percent. The other top-three performers were Frontier Communications Corp and AT&T Inc.


The real estate services group was the best-performing group for the week, up 12 percent, led by its single member, CB Richard Ellis Group Inc. The firm’s second quarter earnings easily beat the consensus estimate, driven by year-over-year increases in investment sales revenue and leasing revenue.
The office electronics group was the second-best performer, increasing 5 percent. The group’s single member, Xerox Corp, reported earnings in the prior week above the consensus estimate, and it guided 2010 earnings up. The strength in the stock this week appeared to be a carryover from that report.
The diversified chemicals group outperformed, rising 4 percent, led by E.I DuPont & Co which reported earnings above the analysts’ consensus estimate and raised its full year outlook above the analysts’ forecast.

The photo products group was the worst performer, down 18 percent, led by its single member, Eastman Kodak Co, which reported earnings below the consensus forecast.
The tires & rubber group underperformed, down 13 percent. The group’s single member, Goodyear Tire & Rubber Co, reported earnings above the consensus, but the stock sold off on concerns about the outlook for the second half.
The building products group underperformed, losing 10 percent, led by its single member, Masco Corp, which reported earnings above the consensus but warned that the second half would be challenging as home building activity was slowing and big-ticket items would continue to be deferred.

There may be an opportunity for gain in M&A (merger & acquisition) transactions in 2010. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.
As governments around the world begin to wind-down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for stocks.

U.S. Government Securities Savings Fund – UGSXX • U.S. Treasury Securities Cash Fund – USTXX
Near-Term Tax Free Fund – NEARX • Tax Free Fund – USUTX

The Economy and Bond Market

Treasury bonds rallied this week on mixed economic news. Bonds appeared to be reacting to stocks, trading inversely this week driven largely by global macro concerns.

Economic data was mixed this week as second quarter GDP disappointed a little while housing data was a little better than expected. An interesting data point out of Europe this week was the European Commission Economic Sentiment Indicator for the Eurozone which reached the highest level in more than two years. This is counter intuitive given the ongoing European financial crisis but the weaker Euro has boosted exports and German unemployment has now fallen for 13 consecutive months, so maybe things aren’t as bad as they seem.


European confidence remains surprisingly strong and is an interesting counter point to all the recent bad news.
The S&P/CaseShiller Composite 20 Home Price Index rose a better than expected 4.6 percent. At the same time Freddie Mac reported that mortgage rates hit another record low of 4.54 percent.
The Chicago Purchasing Managers Index unexpectedly rose, indicating that manufacturing activity remains strong.

Second quarter GDP was somewhat disappointing, expanding at a modest 2.4 percent.
Durable Goods orders for June declined one percent, well below expectations of a one percent gain.
The Fed’s Beige Book report highlighted the slowing pace of economic activity in several areas of the country.

Inflation is unlikely to be a problem for some time and this gives central bankers and other policy makers around the world room for expansive policies.

The risk of austerity measures going too far and significantly diminishing economic growth is a real risk.
July 29, 2010

Another ETF Eye-opener

July 28, 2010

One of the Best Gold Watchers

July 27, 2010

Seeing the Good and Bad in Latin America

World Precious Minerals Fund – UNWPX • Gold and Precious Metals Fund – USERX

Gold Market

For the week, spot gold closed at $1,181.05 per ounce, down $8.15, or 0.69 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 2.13 percent. The U.S. Trade-Weighted Dollar Index decreased 1.03 percent.


The U.S. unit of ETF Securities, a global ETF issuer specializing in commodities, filed papers with the SEC to market a gold exchange-traded fund that would be the first to store its bullion in a Singapore vault.
A poll of 55 analysts and traders showed expectations for gold prices in 2011 have risen by nearly 7 percent to a median of $1,228 per ounce, and 2010 gold expectations have risen 4 percent to a median of $1,197 per ounce.
Jamie Sokalsky, the CFO of the world’s largest gold producer, recently noted the concerns that pushed the gold price to record highs above $1,200 per ounce have not been addressed despite the weakened gold price within the past weeks.

A congressional subcommittee has been asked to investigate the growing backlog in foreign procurement of U.S. bullion and collectors’ precious metals coin blanks manufactured by the U.S. Mint.
The gold price fell to a three month low on Tuesday to around $1,160 per ounce due to fear abatement, central bank tightening, and ETF liquidation.
Seasonally, the next natural catalyst for gold will be the return of jewelry manufactures as we close out the summer. In the mean time, the gold market may be relatively flat.

UBS recently stated “We believe that ongoing pressure on sovereign debt markets, combined with persistent concerns over private sector credit contraction will raise the spectre of debt monetization repeatedly over the next few years. We expect that this background will remain very supportive for gold prices over the period.”
Earnings reporting season for gold companies is in full swing. What is interesting is the number of companies that have established a dividend or raised their dividend payout, which should give these companies greater appeal to mainstream investors.
The attraction of dividend payments along with gold companies starting to be compared on other fundamental valuation metrics such as PE ratios is not a sign that there is “bubble in gold company valuations”.

The debate around the nationalism of South African mines has created “great uncertainty” with investors, and could even see the development of some projects essentially be put on hold, until after the ruling the African National Congress’s policy review conference in 2012.
Deutsche Bank believes the “gold price weakness has been driven more by a liquidation in a net length among the investor community than a structural change in market fundamentals, and history suggests investor de-leveraging can persist for another month.”
St. Louis Federal Reserve Bank President James Bullard commented that the economic outlook was unusually uncertain. He further noted, “The U.S. is closer to a Japanese-style outcome today than at any other time in recent history…”

Global Resources Fund – PSPFX • Global MegaTrends Fund – MEGAX

Energy and Natural Resources Market


Indonesia, the largest coal exporter in the world, exported 24.49 million tonnes of coal in June, rising 32.23 percent from 18.52 million tonnes in May.
In June, Japan’s crude oil imports were up 0.5 percent year-over-year to 3.16 million barrels per day, liquefied natural gas imports were up 9 percent year-over-year and coal imports up 14 percent year-over-year, according to data published by the Finance Ministry.
According to the National Development and Reform Commission, China domestic coal production reached 1.57 billion tons in the first half up by 20.1 percent year-over-year.
Mitsui O.S.K. Lines Ltd., the operator of the world’s largest merchant fleet, raised its full-year profit forecast as demand for transporting goods between Asia and the U.S. and Europe rebounded.

Iraq’s oil ministry has said the country’s oil exports had dropped to 1.8 million barrels per day in June from 1.9 million barrels per day the month before, due to bad weather and bomb attacks.
Japan’s refined copper exports fell 22 percent year-over-year in June while refined zinc exports fell 37 percent from a year earlier, Ministry of Finance data showed.

The Hellenic Shipping News reported that Russia plans to give licenses for development of 41 iron-ore and 31 coking coal deposits during 2011-2015. The iron-ore deposits are estimated to have a reserve base of 16.6 billion tonnes, while the coking coal reserves are estimated to be about 80.5 billion tones.
Arabian Oil Co., the world’s biggest oil company, said Wednesday it signed contracts with several local and international contractors to help it build its estimated $10 billion export refinery at Yanbu on the Red Sea. Announced first in 2005, the refinery was originally set to cost $6 billion to build. However, the project’s price tag doubled to as much as $12 billion in 2008 when raw material and commodity prices peaked. Construction of the facility is now estimated to cost about $10 billion.
State-run explorer Oil India has set aside $2 billion for overseas acquisitions, chairman NM Borah told reporters this week. Bigger rival Oil & Natural Gas Corporation has spearheaded India’s hunt for foreign petroleum assets, often competing with Chinese companies, but smaller players such as Oil India and refiners like Indian Oil Corporation are also scouting for assets, Reuters reported..

Oil reserves in Nigeria have dropped by 4.79 percent to 31.81 billion barrels over the past year because companies refuse to undertake exploration, a senior industry official said this week.
China’s natural gas supplies may face pressure in some regions this winter because of insufficient storage capacity and slowness by some companies to import supplies, said the National Development and Reform Commission.

China Region Opportunity Fund – USCOX • Eastern European Fund – EUROX
Global Emerging Markets Fund – GEMFX

Emerging Markets


South Korea’s GDP expanded by a faster than expected 1.5 percent quarter-over- quarter, or 7.2 percent year-over-year, in the second quarter, driven by strong exports of automobiles, semiconductors, and machinery. Consumer confidence held at a five month high of 112 in July.
Profits at China’s large industrial companies in 24 regions climbed 71.8 percent year over year to RMB 1.61 trillion in the first half of this year.
China’s land supply for residential real estate construction increased 113 percent in the first half compared with a year ago, while the average price of residential land declined 10.6 percent sequentially in the second quarter.
The Indonesian rupiah appreciated to a three-year high on Thursday against the U.S. dollar, as the local stock market rose to a record high and government forecasted 6 percent GDP growth in the second half of this year.
Lojas Renner, one of the largest Brazilian retailers, reported strong 2Q results that were boosted by better procurement practices that resulted in an improvement in the earnings before interest, taxes, depreciation and amortization (EBITDA) margin to 24.8 percent from 17.8 percent a year earlier.
OHL toll road group in Brazil reported a 29 percent traffic growth in 2Q brought about by an economic recovery in the country.
Chilean banks, Banco de Chile and Santander Chile, also reported strong 2Q results with net income growing 57 percent year-over-year.
Hungary sold more debt than planned at an auction of three month Treasury bills on Wednesday as traders said yields were attractive given the interest rate outlook, according to Bloomberg.

China’s new loans to property developers fell 62 percent sequentially in the second quarter to RMB 122 billion, representing a 32 percent decrease year-over- year, as banks intentionally reduced balance sheet exposure to the property sector as a result of credit control and risk management.
Vietnam’s long term foreign and local currency debt ratings were reduced by Fitch Ratings to B+ from BB-, due to concerns over declining foreign reserves and weak banking system.
The capital output ratio defined as the investment portion of GDP divided by real GDP growth measures how much investment is needed to produce GDP growth, the higher the ratio, the more inefficient the investment. As the chart shows, the efficiency of Russia’s investment into economy was particularly wasteful under socialism. It has now reached a stable state at around 4 times (equal to that of China), which is below the world average at 3 times.


Although China’s domestic A share market staged a close to 10 percent rebound in July, the best performer in Asia for the month, Chinese mutual funds by and large did not participate in the rally. These mutual funds, together with domestic insurance companies who are expected to be approved to raise allocation to equities in August, may provide liquidity support for a continued recovery in Chinese domestically listed stocks.
A recent M&A activity in the Brazilian telecom sector has created three major fully integrated players America Movil, Telefonica and Oi, that should offer bundled products (fixed line, wireless and pay TV) at a reduced cost for customers.
We have noted an inflow into the Chilean equity market by the local pension funds that scaled down their international exposure and boosted valuations of the Santiago bourse.
The IMF’s new loan agreement for $15 billion requires fiscal policy changes from Ukraine aimed at lowering the deficit to 5.5 percent of GDP in 2010 and 3.5 percent in 2011. The IMF’s renewed engagement with Ukraine opens up the possibility of loans from the European Commission and the World Bank, according to RGE Monitor.

In addition to ongoing property tightening, Chinese government’s goal to reduce energy consumption per unit of real GDP by over 5 percent this year from 2009, as mandated by its 11th Five Year Plan, may result in more plant closures, as a matter of expediency, especially in heavy industries, and a slowdown in economic activity in the second half of this year.
Macquarie Airports indicated that they will be selling its 14 percent stake in ASUR. At this point it remains uncertain who the buyer might be but the transaction may well improve liquidity in the ASUR shares.
On Thursday, the Russian government finalized its list of companies to be privatized in 2011-2013, and the amount it is planning to raise through these privatizations is close to $35 billion US dollars. The slope of the regression line of Russian Trading System market returns vs. total IPO issuance is negative, suggesting that a large supply of state’s shares could have a negative impact on the market.

Leaders and Laggards

The tables show the performance of major equity and commodity market benchmarks of our family of funds.
Weekly Performance Index Close Weekly
Change($) Weekly
Change(%) DJIA 10,465.94 +41.32 +0.40% S&P 500 1,101.60 -1.06 -0.10% S&P BARRA Value 525.54 +1.89 +0.36% S&P BARRA Growth 567.85 -3.19 -0.56% S&P Energy 403.14 +0.84 +0.21% S&P Basic Materials 193.56 -0.28 -0.14% Nasdaq 2,254.70 -14.77 -0.65% Russell 2000 650.89 +0.24 +0.04% Hang Seng Composite Index 2,954.24 +29.28 +1.00% Korean KOSPI Index 1,759.33 +1.27 +0.07% S&P/TSX Canadian Gold Index 346.45 -8.74 -2.46% XAU 169.72 -3.70 -2.13% Gold Futures 1,183.50 -8.10 -0.68% Oil Futures 78.95 -0.03 -0.04% Natural Gas Futures 4.92 +0.34 +7.40% 10-Yr Treasury Bond 2.91 -0.09 -2.90%
Monthly Performance Index Close Monthly
Change($) Monthly
Change(%) DJIA 10,465.94 +691.92 +7.08% S&P 500 1,101.60 +70.89 +6.88% S&P BARRA Value 525.54 +34.02 +6.92% S&P BARRA Growth 567.85 +36.31 +6.83% S&P Energy 403.14 +29.78 +7.98% S&P Basic Materials 193.56 +21.10 +12.23% Nasdaq 2,254.70 +145.46 +6.90% Russell 2000 650.89 +41.40 +6.79% Hang Seng Composite Index 2,954.24 -332.01 -14.83% Korean KOSPI Index 1,759.33 +61.04 +3.59% S&P/TSX Canadian Gold Index 346.45 -36.35 -9.50% XAU 169.72 -7.91 -4.45% Gold Futures 1,183.50 -66.40 -5.31% Oil Futures 78.95 +3.32 +4.39% Natural Gas Futures 4.92 +0.30 +6.56% 10-Yr Treasury Bond 2.91 -0.02 -0.82%
Quarterly Performance Index Close Quarterly
Change($) Quarterly
Change(%) DJIA 10,465.94 -701.38 -6.28% S&P 500 1,101.60 -105.18 -8.72% S&P BARRA Value 525.54 -52.80 -9.13% S&P BARRA Growth 567.85 -51.37 -8.30% S&P Energy 403.14 -51.25 -11.28% S&P Basic Materials 193.56 -15.17 -7.27% Nasdaq 2,254.70 -257.22 -10.24% Russell 2000 650.89 -86.85 -11.77% Hang Seng Composite Index 2,954.24 +13.16 +0.45% Korean KOSPI Index 1,759.33 +30.91 +1.79% S&P/TSX Canadian Gold Index 346.45 -4.27 -1.22% XAU 169.72 -8.87 -4.97% Gold Futures 1,183.50 +10.80 +0.92% Oil Futures 78.95 -6.22 -7.30% Natural Gas Futures 4.92 +0.94 +23.59% 10-Yr Treasury Bond 2.91 -0.82 -21.93%
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting Home – U.S. Global Investors or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.
The Eastern European Fund invests more than 25 percent of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.
Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.
Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in these sectors. Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.
Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Each tax free fund may invest up to 20 percent of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. Bond funds are subject to interest-rate risk; their value declines as interest rates rise. The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.
Past performance does not guarantee future results.
These market comments were compiled using Bloomberg and Reuters financial news.
Holdings as a percentage of net assets as of 6/30/10:
Verizon Communications Inc.: All American Equity Fund 1.01%
Frontier Communications Corp.: All American Equity Fund 0.93%
AT&T Inc.: All American Equity Fund 1.03%
CB Richard Ellis Group Inc.: 0.00%
Xerox Corp.: 0.00%
E.I. du Pont de Nemours & Co.: 0.00%
Eastman Kodak Co.: 0.00%
Goodyear Tire & Rubber Co.: 0.00%
Masco Corp.: 0.00%
Mitsui O.S.K. Lines Ltd.: 0.00%
Arabian Oil Co.: 0.00%
Oil & Natural Gas Corporation: 0.00%
Indian Oil Corporation: 0.00%
Lojas Renner S.A.: Global Emerging Markets Fund 3.18%
Obrascon Huarte Lain S.A.: 0.00%
Banco de Chile: 0.00%
Banco Santander Chile: 0.00%
America Movil: Global MegaTrends Fund 2.18%, Global Emerging Markets Fund 1.62%
Telefonica: 0.00%
Oi: 0.00%
Grupo Aeroportuario de Sureste SAB de CV: Global MegaTrends Fund 4.65%
*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The S&P BARRA Growth Index is a capitalization-weighted index of all stocks in the S&P 500 that have high price-to-book ratios.
The S&P BARRA Value Index is a capitalization-weighted index of all stocks in the S&P 500 that have low price-to-book ratios.
The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The MSCI Russia Index is a free-float weighted equity index developed in 1994 to track major equities traded in the Russian market.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The S&P/Case-Shiller Index tracks changes in home prices throughout the United States by following price movements in the value of homes in 20 major metropolitan areas.
The European Commission Economic Sentiment Indicator is a monthly economic sentiment indicator reflects general economic activity of the EU. This indicator combines assessments and expectations stemming from business and consumer surveys. Such surveys include different components of the economy: industry, consumers, construction and retail trade. In order to comply with new Eurostat data series, the base year of the ESI has been changed in August 2003 from 1995 to 2000.
The Russian Trading System Index is and indicator of the 50 most liquid Russian stocks listed on the exchange.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
Advanced G-20 economies references members of the G-20 whose economies are considered by the IMF to be developed. This includes Canada, United States, Austria, Belgium, France, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, Australia, Japan and Korea. Emerging G-20 economies references members of the G-20 whose economies are considered by the IMF to be emerging. This includes Brazil, India, Indonesia, Hungary, Russia and Saudi Arabia. BRIC refers to the emerging market countries Brazil, Russia, India and China.

The Land of Upright People

Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
Burkina Faso is a landlocked country in West Africa. It is surrounded by six countries: Mali to the north, Niger to the east, Benin to the southeast, Togo and Ghana to the south, and Côte d’Ivoire to the southwest.

Burkina is 274,000 km² with a population of plus 15 million it’s people belong to one of two major West African cultural groups – the Voltaic and the Mande.

Formerly called the Republic of Upper Volta (The country owes its former name of Upper Volta to three rivers which cross it: the Black Volta (or Mouhoun), the White Volta (Nakambé) and the Red Volta (Nazinon). It was renamed Burkina Faso in August 1984 – meaning “the land of upright people” in Mòoré and Dioula, the two major native languages of the country. Figuratively Burkina may be translated as “men of integrity” from the Mòoré language and “Faso” means “father’s house” in Dioula.

After gaining independence from France in 1960 the country is now a semi-presidential republic. The parliament consists of one chamber known as the National Assembly, it has 111 seats with members elected to serve five year terms. There is a constitutional chamber with ten members and an economic and social council whose roles are purely consultative. Burkina Faso is divided into thirteen regions, forty-five provinces, and 301 departments.

Burkina Faso’s capital is Ouagadougou. It is a member of the African Union, Community of Sahel-Saharan States, La Francophonie, Organization of the Islamic Conference and Economic Community of West African States.

Burkina Faso is made up of two major types of terrane. The larger part of the country is covered by a peneplain (land worn down by erosion almost to a level plain Рa nearly flat land surface) which forms a gently undulating landscape with a few isolated hills. The southwest of the country is a sandstone massif, where the highest peak, T̩nakourou, is 749 meters tall. The average altitude of Burkina Faso is 400 meters Рthe difference between the highest and lowest terrain is only 600 meters.

Burkina Faso has a tropical climate with two seasons – wet and dry. During the rainy season the country receives 600 to 900 millimeters of rainfall, the rainy season lasts four or five months, starting in May/June and it rains, off and on, till September. In the dry season, the harmattan – a hot dry wind coming from the Sahara desert – blows.

Burkina Faso’s natural resources include manganese, limestone, marble, phosphates, pumice, salt and gold, there are currently operating copper, iron, manganese and gold mines in the country.
Burkina Facts: The inhabitants of Burkina Faso are known as Burkinabè.
Agriculture represents 32% of its gross domestic product
A large part of the economic activity of the country is funded by international aid
Burkina Faso is one of the poorest countries in the world – per capita gross domestic product (GDP) = $440
More than 80% of the population relies on subsistence agriculture
Drought, poor soil, lack of adequate communications and other infrastructure, a low literacy rate, and an economy vulnerable to external shocks are all longstanding and ongoing problems
Many Burkinabe migrate to neighboring countries for work sending substantial amounts of money back home – these remittances provide a contribution to the economy’s balance of payments that is second only to cotton as a source of foreign exchange earnings
The currency of Burkina Faso is the CFA franc
Burkina Faso is one of the few West African countries that’s not predominantly Muslim
A railway connects Burkina with the port of Abidjan, Cote d’Ivoire, 1,150 kilometers (712 mi.) away
Primary roads between main towns in Burkina Faso are paved
Phones and Internet service providers are relatively reliable, but the cost of utilities is very high

Burkina is attempting to improve its economy by: developing its mineral resources
Improving its infrastructure
Making its agricultural and livestock sectors more productive and competitive
Stabilizing the supplies and prices of food grains
Implementing a fairly widespread privatization program
Adhering to strict policy rules set out by the International Monetary Fund (IMF) and the World Bank (WB)

Economic growth has averaged around 6% per year for the last 15 years.
Burkina Faso also has a new investment code that is helping to promote foreign investment. Reforms include:The adoption of a labor code in May 2008
Improving the process to transfer property
The elimination of commune authorization requirements
The creation of a one-stop shop to facilitate construction permits
A decrease of the corporate tax rate from 35% to 30%
A decrease on dividend taxes from 15% to 12%
Implementing major changes to the tax system
Creating a number of ‘mining friendly’ programs with the specific aim of attracting new mining and development companies
Announcing their intention to set up a ‘mining development fund’ with Groupement des Professionnels Miniers (GPMB) behind the move, specific details have yet to be released
Building a higher education institute for mining engineers and other executives

“Gold production in Burkina Faso more than doubled from 2008 to 2009. The entire mining sector in the country is booming. The strongest increase in any sector during 2009 has been in gold production. Thanks to a strongly growing price of precious metals on the world market during recent years the mining and extractive industries are experiencing a real boom in Burkina Faso. The number of permits and authorizations issued rose from 537 in 2008 to 599 in 2009, an increase of 11.6 percent. The industrial production of gold has risen from about 5,000 kg in 2008 to 11,642 kg in 2009, representing more than a doubling of production. These development should be helping to strengthen the position of our country as a mining country.” Condensed fromPrime Minister Tertius Zongo’s state-of-the-nation speech to the Ouagadougou parliament
Burkina Faso is now at the start of a mining boom. Looking to take advantage of the countries abundant natural resources, the number of ‘mining friendly’ programs the country has to offer and hoping to benefit by being a “first mover” a number of mining and exploration companies have decided to develop assets in Burkina Faso. One of them is…

Riverstone Resources TSX.V – RVS
Share Structure
Total Institutional & Corporate Ownership: 20,680,000 = 22.8%
Total Insider Ownership; 4,366,000 = 4.8%
Retail Ownership: 65,183,190 = 72.4%
Outstanding shares: 90,229,190
Warrants: 24,272,876
Options: 7,400,000
Fully Diluted: 121,902,000
Market Capitalization @ .50 per share: $45,100,066
Cash: US$ 8,500,00.00
Debt: nil

Michael D. McInnis, P.Eng, Director, President & CEO. Over 35 years of experience in exploration and management, track record with high quality mineral projects

James Robertson, P.Eng, Director. Over 35 years of experience, past Director of Primary Metals before takeover by Sojitz Corp.

Alvin Jackson, P.Geo, Director. International experience, past President and COO of EuroZinc Mining

Rick Bailes, P.Eng, Director. Over 30 years in mining, past President and CEO of Canadian GoldHunter

Gregory Isenor, P.Geo, Director. Past CEO of Jilbey Gold before its takeover by High River Gold
Paul G. Anderson, P. Geo, Vice President Exploration. International experience, previously in Burkina Faso with Channel Resources in 1990’s

Riverstone Resources Inc. has focused its exploration activities on West Africa because its elephant country for gold exploration – hosting world-class gold deposits in Ghana, Mali and Guinea. In addition, West Africa has had the fastest growth in gold production in the world over the past five years.

Obuasi (42M oz)
Bibiani (5M oz)
Obotan(2.8M oz)

Sadiola (14M oz)
Morila (5.9M oz)
Syama (5.2M oz)
Yatela(4.4M oz)
Loulo(4.0M oz)

Burkina Faso
Essakane (5.2M oz)
Taparko(1.5M oz)
Mana (1.2M oz)
Youga(1.5M oz)
Inata/Belahoure(1.7M oz)

The Company has chosen to concentrate its efforts in Burkina Faso because the belts of favorable rock that host all of the major gold deposits in Ghana continue into Burkina Faso.

Burkina Faso has undergone less than 10 years of modern exploration and offers the chance to build a property portfolio in an area that has been severely under-explored. Riverstone management believes there are opportunities for further major discoveries in the country.


Since 2003 Riverstone has amassed a total of 13 exploration permits in 6 regions with its current land package covering some 2,300 square kilometers.

1. Karma – Five contiguous permits with four gold deposits to date: Rambo, Kao and Goulagou I & II. The Company has completed an initial independent NI43-101 resource estimate at Karma with an indicated resource of 820,500 ounces of gold and an inferred resource of 320,300 ounces of gold. The resource is contained within 4 deposits all within 7 km of each other and drilling has been limited to a 100 meters in depth. The Company is currently focused on expanding the gold resource contained within the Karma Project.

The Rambo Deposit contains 56,900 oz of gold at an average grade of 7.02 g/t, the deposit is open for expansion and is anticipated to become the starter pit.

Goulagou I & II contain 577,000 oz of gold at a grade of 1.83g/t – the resource is anticipated to increase with this year’s drilling program. Both deposits appear to be showing improved grades to the north.

The Kao Deposit contains 507,000 oz of gold at a grade of 0.91g/t and is still open to the north, north east and depth.

Gold resources at Karma are shallow, the bulk of resources is in oxide material above 100 meters in depth. There is the potential for a centralized gold processing facility to handle the material from all the deposits. There is also significant potential to expand gold resources with many untested gold showings.

A new discovery, the Nami artisanal site, is located 4 kilometers north of the Rambo deposit. Artisanal activity commenced on the site in April, 2009 and activity has increased substantially since then. Artisanal workers excavate small, vertical shafts and collect material – in Nami’s case from quartz veins and quartz breccias -which they process through a crude sluice box system. Several hundred of these shafts have been excavated to date.

Riverstone has recently undertaken testing of the Artisanal miners waste dumps. The waste dumps are material left behind by the artisanal miners after high grading the quartz veins and they are considered by these miners to carry no gold grade. The average of all samples greater than 0.3 g/t is 1.36 g/t with a high of 8.6 g/t.

“We are very pleased with the results from the waste dump sampling.We knew from our sampling of the *quartz veins and quartz breccias that they carry exceptionally high values of gold but we had very little information on the gold content of the host rock surrounding the quartz bearing material. The average grade of 1.36 g/t returned from the waste dump material certainly exceeded our expectations and is a very positive development for the project.” M.D. McInnis, President and CEO of RVS

*Previous sampling by the Company of the quartz bearing rock returned numerous values in excess of 10 g/t gold with a high of 98 g/t. (See Riverstone News Release dated Jan. 18 and Feb 23, 2010). These high grade values should elevate the average grade of the Nami site to a value well in excess of the 1.36 g/t background value defined by the dump sampling.

Any gold ounces developed at Nami will be accretive to the NI 43-101 gold resource at the Company’s adjacent Rambo, Goulagou and Kao deposits – the Karma Project. Nami is approximately 1.5 km by 600m based on RAB drilling and tracing the quartz veins and altered zone.
Currently there are over 6000 samples in the laboratory and another 20,000 meters of drilling is planned for Karma this year.

2. Ligidi – a 13 km long by 3 km wide gold-in-soils geochemical anomaly that is open in at least one direction. The Ligidi permit covers 225 square km and both Birimian greenstones and Tarkwaiian sediments have been identified on the property. The presence of Tarkwaiian rocks is closely linked to the very large gold deposits found in Ghana.

Riverstone has plans to spend $1mm on this project in 2010. The company expects to have plus $5mm remaining in its treasury at the end of 2010.

Joint Ventured Projects

The Company’s other three projects, all drill ready, will have a total of $1.05m spent on them through the second half of the year as the result of a recently announced option agreement. Riverstone retains 60% after earn in and remains operator.

3. Yaramoko – an 8 km long deformation zone which appears to be the continuation of the mineralized zones at Semafo’s Mana Gold Mine. The Mana Mine is being developed on a series of high-grade gold veins.

4. The Bissa East Project Рcomprises two contiguous Exploration Permits, Tangapella and Biliga. To date, the company has defined three gold zones on Tangapella and two on Biliga. The Bissa East permits collectively cover an area of 498 square km and were acquired to cover portions of the northeast trending Sabc̩ shear zone. The Sabc̩ shear zone hosts a large number of known gold deposits.

5. Solna – The Solna Project comprises three contiguous permits, Solna, Teyango and Yantera. The company has delineated a 30 km long deformation zone that runs through all three properties. Work done to date on the more advanced Solna permit has demonstrated the presence of some very high gold grades in trenches.


Five large exciting projects already in their portfolio, unlimited potential for new discoveries, a mining friendly country that recognizes the need for resource extraction, ongoing legislation changes, the new mining fund and a series of tax breaks all mean Riverstone Resources is in a good position to take advantage of everything Burkina Faso has to offer investors.

Currently Riverstone is valued at roughly $50 per gold oz in the ground. This is very low for West African gold – $75 oz for the insitu value of gold in West Africa.

After the upcoming 20,000 meter drilling program this author believes Riverstone’s current gold resource of 1,140,800 Indicated and Inferred oz’s could rise substantially.
Burkina Faso and RVS.v are, in this authors opinion, offering a chance for early investors to get in on the ground floor of a mining boom. Riverstone Resources TSX.V – RVS and Burkina Faso – The Land of Upright People – should be on every investors golden radar screen.
Is it on yours?
Richard (Rick) Mills

If you’re interested in the junior resource market and would like to learn more please come and visit us at***Richard is host of and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald and Financial Sense.

***Legal Notice / Disclaimer This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report. Richard Mills does not own shares in any company mentioned in this article. Riverstone Resources is an advertiser on

Just the Facts

Via Stoppani 220
Milan, Italy

Web site: www.stockmarket

July 23, 2010

I’ve known for a long time that elections were all about money, but I never realized just how bad and broad the problem was until I read that most of the sitting judges along the Gulf Coast receive donations from big oil. Big money has its hand in everything and it is the dominant force in the United States today. It elects your government, decides how you live, decides what and how you eat, where you can go and where you can’t, and what kind of life your children will live. It’s the modern version of the old fashioned “company store”, the theme from Tennessee Ernie Ford’s song “Sixteen Tons”. The American electorate allowed that to happen and now the whole process has taken on a life of its own, like a cancer cell that multiplies, grows, and spins out of control. One day you’re feeling a little tired, you go to the doctor, he pulls out an x-ray and the next day you’re getting your affairs in order. There will good and bad days along the way, but the trend is set in stone and it is down. That’s where we are today.

The US government has spent anywhere from US $3 to US $9 trillion dollars so that twenty or so companies could report “blow out results”. These results are the combination of transferring debt from them to you and flouting generally accepted accounting practices. Big money has made this all possible. You on the other hand have yet to see a new water plant, sewage line, school, road or electric plant built in your city. Remember Obama standing there just after he was elected promising all of those things? Money for infrastructure! Well you’re going to have a long, long wait before any of that comes to pass. If I may paraphrase, hell will freeze over first. All of this is creating uncertainty in the markets and that’s why we’ve seen so much volatility; eleven 90% down days and nine 90% up days since April 26th. Just look at the last eight sessions with four triple digit changes, two up and two down. If you don’t like what you see, just go away and come back the next day and it all will have changed. That type of volatility is draining, like chemotherapy, and eventually it saps the life right out of the market and it collapses of its own weight. We are headed toward that end now.

Whenever you have conditions like we see today, it’s best to leave the guesswork to everybody else and focus only on what you really know. That’s why I kept the preceding chart as simple as possible. So here’s what I know:
The Dow topped at 14,164.53 on October 9, 2007.
The Dow fell from the October 9th all-time high to 6,469.95 on March 10, 2009 giving back 57.7% of its bull market gains accumulated over twenty-five years.
From the March 10th low the Dow rallied up to 11,258 on April 26, 2010 recovering 61.8% of the previously mentioned losses.
From that April 26th high the Dow has carved out a series of three lower highs (small horizontal black lines) and three lower lows (small horizontal green lines).
The upper band of the current trading range (descending blue line) has yet to be violated.
Days with big losses have consistently heavier volume than days with big gains and that has been the case since the October 9, 2007 all-time high.
The Dow did not confirm the all-time high in the Transports posted on May 26, 2008
The Dow did not confirm the April 30, 2010 closing high, and
The Dow closed below its February lows but the Transports have not closed below their respective February low. This is yet another non-confirmation as you can see below:

Whenever you analyze the market it’s always good to state just what you know and leave any opinions and suppositions to the CNBC crowd. To date I can see that the Dow has not violated the upper band of the descending trend lines that originate with the April 26th closing high while the Transports could be on the verge of doing so today.

I also know that the Transports have a huge divergence with the Baltic Dry Index as you can see below. Compare the July decline in the BDI with the July rally in the Transports. It is supposedly common knowledge to say that China is responsible for the former, but that overlooks the fact that the BDI takes in goods shipped all over the world and that includes the United States!

If I want to expand what I know to the US economy as a whole, I see that consumption continues to decline, housing continues to fall, and unemployment continues to be a real problem. I know that the US is a consumption based economy and that consumption was financed by sucking money from constantly rising housing prices. I also know that real wages are declining and savings is actually increasing in the US. Finally, I know the level of debt in the US is truly staggering and continues to increase daily. The only solution on the table is to print money; it’s a one size fits all panacea that will eventually kill the patient. Hence the US dollar:

Think of the United States as a very large company and think of the US dollar as its common stock. As you can see the share price has been declining since 2001.

We have seen two significant reactions over the last two years, and the second one has apparently ended. Below I have posted a daily chart of the dollar that shows the break down and change in trend:

This produces a very strange combination of a declining dollar and a deflating economy and must have Bernanke staring at the ceiling in his bedroom at 3 am. I saw him in his testimony yesterday and he tries to hedge his bets but in the end he is forced to take a stand. Recently the dollar broke down out of its rising trading range (black circle) and then broke down through strong support at 83.35. After a brief reaction back up to 83.39, the greenback fell hard today and is trading at 82.56 as I type (1 pm EST). Once strong support at the old historical high of 80.16 is violated it will be clear to all concerned that the end is near and the dollar will become a financial pariah. Without going into detail, that’s why gold will not decline for more than a couple more weeks, and will not fall to US $850 as so many are predicting. Gold is experiencing a hiccup; no more and no less. So we have the primary in the Dow and dollar headed down, while the primary trend for gold is headed higher. That’s what I know and that’s real. Therefore you neither short the dollar and Dow or you stay out, and you either own gold or you stay out. Finally I know that going against the trend will take you into bankruptcy, and that concludes our lesson for today.

PORTFOLIO SUMMARY (thru July 21st)


Sept Dow Short 2 10,210 10,059 3,010
Mini-Dow Short 1 9,850 10,059 -1,045
Mini-Dow Short 1 9,970 10,059 -445
*Dec Gold Long 1 1,219.0 1,186.0 -3300
*Dec Gold Long 1 1,248.0 1,186.0 -6,200
*Aug Gold Long 1 1,190.0 1,184.5 -550
*July Copper Short 1 293.0 304.0 -550
*Aug Oil Short 1 79.65 71.95 7,700
*Aug Oil Short 1 74.51 71.95 2,560
*Aug Oil Short 1 75.80 76.30 -500
*Sept Bond Short 1 124.08 123.28 341

% PROFIT(LOSS) 2.50%

*Position closed
* I was stopped out of Aug gold at 1,184.50!

[Please note that the new website at will become operational this week. Also, note that you can contact us at our new e-mails, (general inquiries regarding services), (administrative issues) or (any market related observations).]
July 22, 2010

Welfare & Warfare

Most people in America associate the Democratic Party with spending on welfare programs and the Republican Party with spending on warfare. Until reading Niall Ferguson’s brilliant
The Ascent of Money

The Ascent of Money
, I never realized that welfare and warfare have gone hand in hand for over a century. The immortal German warmonger Otto von Bismarck was the first politician to introduce social insurance legislation in the 1880s. His reasoning was not strictly humanitarian.

According to Bismarck, “A man who has a pension for his old age is much easier to deal with than a man without that prospect.” Bismarck was a shrewd politician who realized that when you provide people something for nothing, they will vote for you. When you go to war with France, a population sedated with entitlements is more easily malleable and controllable. David Lloyd George rolled out pensions and national insurance in Great Britain prior to World War I in order to win votes. Politicians began a century of addiction to welfare programs, as the poor voted for those that promised them the most. The world has now reached its limit of unfunded promises. The financial crisis in the last two years was caused by politicians throughout the world promising benefits to their citizens and paying for these benefits with borrowed money. Margaret Thatcher aptly summed up what has happened:

”The problem with socialism is that eventually you run out of other people’s money.”

The world has run out of other people’s money.

Britain expanded their social welfare state during and after World War I. With demobilization in 1918, they introduced unemployment insurance as a method to keep former soldiers from disrupting their country. Winston Churchill rolled out an ever growing array of social programs to keep the lower classes from revolting. The Japanese government, after World War II, initiated national insurance for sickness, injury, childbirth, disability, death, old age, and unemployment. Nations began to cover all citizens against everything that could possibly go wrong. Is it a coincidence that the largest expansions of the U.S. welfare state occurred in the 1930’s before a World War, in the mid 1960’s in the midst of the Vietnam War, in 2003 at the outset of the Iraq invasion, and in 2010 as we continue to fight wars in Iraq and Afghanistan? It was essential for politicians to buy off the populace before conducting undeclared wars in far off lands. Why? Who has benefitted from entitlement spending and endless warfare? Politicians and the Military Industrial Complex benefit. The way to get elected in the U.S. since the 1930s has been to promise voters benefits while ignoring the long-term costs. The defense industry and their lobbyists benefit by creating phantom enemies around the globe and stirring up the masses through fear and propaganda. The other beneficiary has been the banking syndicate and their owned printing press called the Federal Reserve. The welfare promises and constant warfare over the last century wouldn’t have been possible without the Federal Reserve and their ability to create constant inflation.

Guns & Butter

Politicians discovered that the populace will go along with their never ending military adventures if they were bought off with promises of generous pensions, free medical insurance, subsidized housing, unlimited drug benefits, farm subsidies, tax loopholes, and thousands of other voter boondoggle payoffs. The Federal Reserve printed the fiat currency, the military industrial complex created the enemies, young Americans fought and died in foreign countries in undeclared wars of choice, and corrupt politicians promised unlimited benefits to the masses in search of votes while rigging the tax system to benefit the rich and powerful. The creation of the Federal Reserve and the Federal Income Tax in 1913 unleashed politicians from the chains of fiscal responsibility. The “guns versus butter model” was turned upside down. Before the Federal Reserve was created the U.S. had to choose between two options when spending its finite resources. It could buy either guns (invest in defense/military) or butter (invest in production of goods), or a combination of both. Politicians handed out butter to the masses and M-16 rifles to our young men. All of the New Deal and Great Society social programs are dependent upon unlimited amounts of debt to be issued for all eternity or until the entire corrupt house of cards collapses.

The beauty of socialism and the welfare state is that when a country is young and vibrant, with a rapidly growing economy, the many pay for the benefits of the few. The baby boom that occurred throughout the modern world after World War II granted politicians the means to expand their welfare pledges. The more politicians promised, the more votes they received. It was a beautiful scheme, until reality struck.

Ferguson provides the reality check in The Ascent of Money:

“Yet there was a catch, a fatal flaw in the design of the post-warfare welfare state. What had started out as a system of national insurance had degenerated into a system of state handouts and confiscatory taxation which disastrously skewed economic incentives.”

The larger the welfare state becomes, the lower economic growth, higher inflation and lower productivity overcome the social benefits. As unions become stronger, the economic system becomes more dysfunctional and warped. The economy in a welfare state becomes bogged down in misallocation of resources, mal-investment, rules, regulations, and distorted pay structures. Incentives to increase profits are eliminated. Incentives to create new businesses and to boost efficiency are purged as bureaucracy gains increasing power. As the populations of the welfare states age, there are only a couple of alternatives for the politicians who never looked beyond the next election when passing legislation to hand out more entitlements. Politicians increase taxes on the productive to pay entitlements for the unproductive. The entitlement promises are so great in the United States that politicians couldn’t possibly raise taxes high enough to pay for them. This is where a willing Central Bank steps in and prints money and allows politicians the easy out of borrowing to pay the entitlement promises. This method works until it doesn’t. Ask Greece and Spain.

Turning Japanese

The welfare state really gained momentum after World War II with Japan and Great Britain leading the way. Ferguson describes the beliefs that overtook the developed world:

“From now on, the welfare state would cover people against all the vagaries of modern life. If they were born sick, the state would pay. If they could not afford education, the state would pay. If they could not find work, the state would pay. If they were too ill to work, the state would pay. When they retired, the state would pay. And when they finally died, the state would pay their dependents.”

With a post-war worldwide baby boom, the taxes easily paid for the benefits in the early years. The myopic politicians and bureaucrats failed to consider that life expectancy would increase from 62 years old in 1935 to 78 years old today, a 26% increase in 75 years. They also failed to anticipate that the Baby Boomers would have fewer children. The average family size has plunged from 3.5 in 1935 to 2.5 today, a 29% decline. After the implementation of Johnson’s Great Society programs in the late 1960s, the percentage of families with 2 or more children plummeted from 36.7% in 1970 to 23.7% in 2007.

As usual, any program conceived by politicians always has unintended consequences because they have not properly considered the potential scenarios. A properly run Ponzi scheme like Social Security, Medicare, and Medicaid requires that enough new money come into the system from new suckers to pay off the old suckers. With the old suckers living much longer than anticipated and not enough new suckers being born, politicians have resorted to doing absolutely nothing. Any politician who proposes any adjustment, restriction or cut in these programs is immediately ridiculed, spat upon and run out of office by the AARP and the entitled classes. The U.S. is about to experience what Great Britain and Japan have already experienced. The major difference is that Japan and Great Britain did not have to fund warfare along with welfare like the U.S. has been doing for half a century. This experiment of delusion will not end well.

Great Britain’s experiment in socialism came crashing down much sooner than Japan, as their population was much older. Their system degenerated into a system of state handouts, high taxation, no economic incentives, slow productivity, high inflation, and economic stagnation. Social transfers rose from 2.2% of GDP in 1930, to 10% in 1960, 13% in 1970 and 17% by 1980. Unions controlled the politicians and resisted all efforts to institute incentives based upon traditional capitalistic principles. Margaret Thatcher was able to slow the advancement of the welfare state for awhile, but was unable to put a stake through its heart. Great Britain continues its long-term decline with a GDP equal to Italy today. Japan, on the other hand, appeared to have figured it out, with the most dynamic welfare state economy in the world from 1970 until 1990. But, then the wheels came off. Demographics have a way of ruining the best laid plans of politicians.

As the life expectancy of the Japanese has risen to the highest in the world at 83 years old, the birth rate in the country plunged. There are more people dying than are being born every year in Japan. They are the oldest society on earth, with 21% of the population over the age of 65, versus 12.8% in the United States. Japan has been in a two decade long slump and has squandered their national wealth on wasteful stimulus programs while failing to address the impossibility of fulfilling their welfare state promises. Japan’s welfare budget is equal to three quarters of tax revenues. Its debt exceeds one quadrillion yen, or 170% of GDP. On its current path toward 240% of GDP, Japan is doomed. As recently as the early-1970s, social expenditures amounted to only about 6% of Japan’s national income. In 1992 that portion of the national budget was 18%, and it was expected that by 2025, 27% of national income would be spent on social welfare.

Niall Ferguson sums up the situation for most of the developed world:
“Longer life is good news for individuals, but it is bad news for the welfare state and the politicians who have to persuade voters to reform it. The even worse news is that, even as the world’s population is getting older, the world itself may be getting more dangerous.”

Dangerous Liaison

The United States has hit the proverbial jackpot, with a rapidly aging population, a $106 trillion unfunded liability, an administration that has piled more unfunded healthcare obligations upon our future unborn generations, spineless politicians that refuse to address the crisis, and as icing on the cake 700 military basis spread throughout the world and an annual defense budget of $895 billion equaling the total spending of the next 11 countries combined. The number of Americans over 65 will surge by 35% over the next 10 years and then by an additional 30% in the following decade. Baby Boom demographics have caught up with politician promises. Therein lays the dilemma. Every day 10,000 Americans turn 50 years old. They will not vote for anyone who promises to cut their entitlements. It is the American way to ignore long term problems until the crisis arrives. Politicians could have proactively addressed the out of control entitlement issue ten years ago. They did not. Now it is too late. The crisis is upon us.

“The US government is on a “burning platform” of unsustainable policies andpractices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.” David M. Walker

The United States of America is the modern day Roman Empire. Any reasonably intelligent person with a calculator can figure out that this will end in economic collapse. And still, we do nothing. Not only do we do nothing, we push our foot down on the accelerator by spending $2 trillion on wars of choice, commit $16 trillion to new drug coverage for seniors, and national healthcare for all at an unknown cost. There is one law that cannot be skirted. An unsustainable trend will not be sustained.

America’s welfare state delusions have been built upon decades of indoctrination, misinformation and the ridiculous belief that heavily taxing the productive and redistributing it to the non-productive benefits society. A nation of 310 million people cannot be governed based on emotional sob stories, but this is the tactic used by liberals to enact ever more entitlements and safety nets without consideration of cost. Steven F. Hayward describes the liberal mindset:

“Liberalism’s irrepressible drive for an ever larger welfare state without limit arises from at least two premises upon which the left no longer reflects: the elevation of compassion to a political principle (albeit with other people’s money) and the erosion of meaningful constitutional limits on government on account of the imperatives of the idea of Progress.”

Liberals have used these tactics to jam through unemployment benefits now reaching 99 weeks. They used these tactics during the healthcare debate. Emotion based sob stories always overcome rational debate, discussions of cost, and overall impact on society. The problem with making decisions with long term fiscal implications based upon compassion only is that you will run out of money before you run out of compassion. Author William Voegeli points out that there is no end to the liberal compassion-fest:

“Because compassion is an emotional response rather than a moral principle, it defeats every attempt to make wise choices about which sufferers do and don’t deserve governmentally dispensed solace.”

The more programs that are created and expanded the larger the constituency for never ending the program. There is no example in the history of the country where a program has been deemed a failure and scrapped. Entitlement programs never die. The current lot of myopic, bought by special interests politicians do not have the guts to cut or even reduce the growth rate of entitlements. Thomas Sowell captures the essence of America today in this quote:

“The problem isn’t that Johnny can’t read. The problem isn’t even that Johnny can’t think. The problem is that Johnny doesn’t know what thinking is; he confuses it with feeling.”

Fallacies & Fear

The chart below paints a picture of impending disaster. There are no easy choices left. Massive tax increases, enormous benefits cuts, or some combination of the two will be required to avert a catastrophe. Greek like demonstrations, protests and strikes are in our future.

The mindset of close to 50% of the U.S. population is exactly the same as the socialists in Greece. In the latest edition of The Casey Report reporter Jayant Bhandari describes the mindset of the entitled class:

“While sitting in a coffee-shop in Athens, I struck a conversation with a very smart-looking, confident girl while we sipped our rather expensive Euro 4 coffee. She was proud of spending time lying on the beaches and buying expensive clothes. By not taking on too much, she was contributing to the world’s peace and happiness. She claimed to be doing a good deed by spending money, which kept the economy going through increased money circulation. Saving money, she said, was bad, something only a selfish person would resort to.

“Fewer working hours mean work for other people and hence less unemployment,” she said. While I was thinking that she was likely a spoiled child of rich parents, she added, with bright, clear eyes, that the rich should be heavily taxed. Realizing something was missing, I couldn’t help but ask if she was on public assistance. Without a blink, with supreme confidence and a complete absence of any guilt, she said, “Yes.”

The reason she didn’t lie is because she did not feel an iota of guilt for being on dole. Those memes have been systematically annihilated. This is a life in complete contradiction to the natural principles. Not only does the educational system teach falsehoods, the machinations of the system are such that there are seemingly no consequences to misguided living.”

The same attitude about saving versus spending took root in the United States in the early 1980s. Citizens became consumers. The only way for a country to achieve long-term growth is for its citizens to save more than they spend. These savings can then be invested within the country to insure that prosperity would continue for future generations. A country of only consumers will eventually collapse under the weight of debt and lack of investment.

Two generations of Americans have been brought up to believe they are owed a pension, owed tax subsidized housing, owed free healthcare and owed the right to happiness provided by Big Brother. The conviction that government can coddle and provide for all the underachievers, disadvantaged and un-ambitious in society has taken root like a weed. This belief is a fallacy.

The other fallacy that has been bought hook line and sinker by the American public is that American style democracy can be spread around the globe through force by utilizing the most powerful military in the history of mankind. In 2000 the U.S. expenditure on Defense was under $400 billion. The Obama 2011 budget proposes military spending of $895 billion. That level is 8 times the next highest country. The country that we are supposed to fear as the biggest threat to world peace, Iran, spends $10 billion per year on their military. This is 1.1% of the annual U.S. spending level. The “War on Terrorism” has cost over $2 trillion since 2001. Do you feel safer than you did on September 10, 2001?

The neo-conservatives like Dick Cheney, Donald Rumsfeld, Paul Wolfowitz, and Josh Bolton have used fear tactics to scare the American public into never ending war in the Middle East, Big Brother like “security” measures like passage of the Patriot Act, and visions of mushroom clouds if we don’t attack our perceived enemies before they attack us. The citizens of the U.S. have not heeded the wisdom of our founders:

“War should only be declared by the authority of the people, whose toils and treasures are to support its burdens, instead of the government which is to reap its fruits.” James Madison

The country has been in constant military conflict across the globe since the 1940s and Congress has never carried out their Constitutional duty to declare war. The military industrial complex and the politicians they control have subverted the U.S. Constitution in order to enrich themselves at the expense of the citizens. The United States of America in 2010 is Greece, but with the biggest baddest military machine ever conceived as our backstop. The only difference between our socialist state and those that are tottering towards collapse is that we are also burdened with policing the world. This guarantees that our empire will not collapse with a whimper, but with a big bang.

The U.S. welfare-warfare state is not the result of any one political party’s agenda. The Republican Party and the Democratic Party have cooperated to achieve this result. Republicans passed the largest entitlement expansion since LBJ in 2003. Democrats have just proposed the largest military budget in the history of mankind. It isn’t easy to run the National Debt from $5.7 trillion in 2000 to $13.1 trillion today. It takes cooperation and mutual ineptitude on the part of both parties to achieve such a spectacular result. $30 billion unfunded unemployment extensions are attached to bills to pay for the war in Afghanistan. If you vote against the bill, you are not supporting our troops and you want to kick people out into the street. The two sides pretend to offer alternatives to the American people, but their agendas coincide:

“Mystical references to society and its programs to help may warm the hearts of the gullible but what it really means is putting more power in the hands of bureaucrats.” Thomas Sowell

The hard truth is that every human life ends in a tragedy. There is no amount of money that can be spent by government bureaucrats to alter this fact. Baby Boomers can keep running on their treadmills, popping vitamins, and trying to stay a step ahead of the grim reaper, but the grave beckons. The real tragedy is that because of the fiscal irresponsibility of politicians and the Boomer generation, future generations of Americans will for the first time in U.S. history have a lower standard of living than their parents. The wealth of the nation has been frittered away by statists and war mongers. The current fiscal path of the country is unsustainable. The immediate actions required to avoid a catastrophic collapse are:
At least a 50% reduction in annual military spending.
A drastic scaling back of Social Security, Medicare, and Medicaid benefits based on age, means testing and instituting real market competition.
Scrapping the entire income tax system and replacing it with a VAT or flat tax.
Eliminating useless government agencies like the Department of Energy and Department of Education because they are complete and utter failures.
An across the board 25% reduction in every government program.
The elimination of the Federal Reserve and the linking of the U.S. dollar to a basket of commodities including gold, silver, oil, and agricultural products, in order to restrict corrupt politicians from spending money we don’t have.
These six steps are the talk of a crazy man. There is no chance of any being implemented today. We all know that the American way is to ignore imminent problems until they morph into a crisis. Unless we act now, this may be our last crisis. The choice is ours.

-James Quinn
The Burning Platform, financial collapse, depression, war

New Banking Crisis, No Double Dip and Flattening the Yield Curve for Growth

Jack Ewing, in The New York Times, writes about an impending banking crisis arising from the need for banks around the world to roll over more than $5 trillion in short term debt by 2012. The problem is probably biggest for European banks, but about $1.3 trillion is in the U.S.

Dave Kansas, in the Wall Street Journal, writes about why the double dippers are wrong.

While I won’t dispute much of what Kansas cites as his reasons for optimism, I can’t help but notice that some of the things are what he expects will happen. Ewing, on the other hand, discusses some facts that are pretty cut and dried. The consequences of the facts cited are where the debate would lie.

Take a look at both articles. If you had to vote for one or the other as being a more significant discussion of what lies ahead, which would it be?

Now, take a look at what Caroline Baum has to say at She says that a recession is virtually impossible with zero interest rates at the short end of the yield curve unless long rates also go to zero. This is close to what happened in Japan over the past twenty years when they held short term interest rates near zero for much of the time. Baum does not discuss the Japanese experience in her article.

Baum says that a flat or inverted yield curve is a necessary condition for a recession. And it is true that it has occurred before every U.S. recession for the last 40+ years. And it is also true that a steep yield curve, 300 basis points or more, traditionally has preceded or accompanied strong growth. We now have a yield curve steepness well above 300 bp.

However, banking analyst Chris Whalen has suggested that growth could be encouraged by flattening the yield curve with an increase in the short term rate. Whelan’s logic seems quite perverse, but it is centered on the thesis that flattening the yield curve would decrease the attractiveness of the Treasury “curve trade” and cause banks to start seeking private lending opportunities. One weakness in Whelan’s argument is that there seems to be little demand in the private sector for loans. The low level of C&I (commercial and industrial) loan activity by banks was discussed yesterday.

If you think that anyone has figured out what the coming months, quarters and even years holds in store, then you better stop reading what others are saying. When you pick several essays at random it is likely that each will have major points in disagreement with all the others.

Disclosure: No positions.

Daily Dispatch: A Dictatorship of the Majority

July 07, 2010 | A Dictatorship of the Majority

Dear Reader,

Over the long weekend we watched Harold and Maude, the 1970s cult classic. While the years haven’t been kind to many movies of that vintage, Harold and Maude struck us as not having lost anything to the cultural transition.

Therefore, if you are looking for something a little different but altogether life affirming, I’d highly recommend it. An added bonus is the soundtrack by Cat Stevens. In fact, as I write, I’m listening to a live version of one of his songs,
Miles from Nowhere


In his time, Cat Stevens was one of the most talented lyricists and musicians on the scene. Then, at the apex of his career, he suffered what was likely an artistic crash. While his tidied-up
Wikipedia page

attributes his subsequent conversion to Islam to a near-fatal drowning incident after which he changed his name to Yusuf Islam and turned his back on music (until recently) my quirky memory recalled him having legal trouble related to stalking a stripper, a sure sign of a tormented soul.

It is a tragic flip side of human nature that, rather than celebrating and enjoying exceptional success, so many people instead suffer a meltdown. One day they are at the top of their profession, and the next they are slinking around strip clubs or lurking in public restrooms, or slipping behind the wheels of their cars while sloppy drunk, then compounding a bad situation by unleashing racist tirades when nabbed.

This tendency to go moth-like to the flames of self-immolation doesn’t stop with individual humans but can suck in an entire culture. As I have previously shared, perhaps the single best example of that is provided by the ancient Hawaiians who, finding themselves in absolute paradise, set about inventing over 2,000 “kapus” or laws, transgressions of most of which were punishable by death. One minute, paradise, the next a hell where the shadow of a prince falling on you was a quick ticket to summary execution.

The U.S. of A. provides yet another useful example of this phenomenon. Blessed by broad ocean-bound borders on two sides, and no real threats from the top or bottom, the country has been free from the constant invasions that have tormented the European principalities and their successor nation-states for time immemorial. Coupled with a legal birthright founded on the idea of “Live and let live,” the extreme success the country enjoyed in its youth should surprise no one.

Unfortunately, rather than remaining true to its founding principles, successive leaderships have led the country deeper and deeper into foreign entanglements, and further and further down the road of populism of the sort that has left Europe gasping for breath.

The situation has now reached a crossroads. In one direction, the direction we here at Casey Research steadily advocate, there is real hope. That hope is based on remembering the principles of self-reliance that made America so economically powerful in its early career a haven with a relatively short list of reasonable laws and regulations, administered by a minimal bureaucracy supported by a modest and simplified tax code.

Economic historian Niall Ferguson recently commented on the surprising lack of dialogue about this path in America. You can, and should,
watch this video here

. (Thanks to steady correspondent Nitin for bringing this to my attention).

Unfortunately, not only are the politicians, of both stripes, not talking about a return to policies based on sound principles of economics to wit those that support the creation of wealth but they are continuing to float all manner of new and damaging ideas for “governing” the nation out of the crisis. Starting with hefty increases in taxes and regulations, actions certain to have exactly the opposite effect.

And it could get a lot worse than that.

Case in point, there was a discussion on BBC radio yesterday about a growing number of voices from the environmental community who are now calling the very principle of democracy into question. The basic thesis is that by encouraging short-term thinking, a democracy is unable to deal with long-term problems in this case, the climate change these true believers see coming 50 or 100 years down the road.

Of course, while they are misguided to the extreme on the environmental concerns, they are technically correct about the whole short-term/long-term thing. That’s because the only thing most politicians are interested in is getting reelected two or four years down the road. Anything outside of that time horizon is of no real import, other than as script elements for political theater.

I also find much to dislike about democracy, preferring instead the simpler system of a republic based on certain inviolable rights. For example, private property is sacrosanct and can’t be taken away for failing to pay a tax or because town managers come to believe your land would be well suited for a convention hotel.

Even so, it concerns me greatly to find my steady disappointment with our degraded democracy which is little more than a rush to the slopes at this point to be shared by members of the environmental movement. I don’t know much, but I know for a certainty that their version of what the country should transition to, and mine, differ dramatically. This is not just idle speculation, as I increasingly think we’ll see a serious transition in the nation and in much of the world resulting from this crisis. Much in the same way that the cascading crisis of the 1930s led to FDR, war, and a fundamental rearrangement of global power.

So, what’s the world going to look like a decade from now? Less government, and what there is strictly collared by hard rules that protect the rights of the individual?
Or more government, where the rights of the individual are all but overrun in the interest of the greater good?

Unfortunately, based on the signs now popping up, I have to believe the odds strongly favor the latter scenario. In the last Great Depression, many of the tools for what might be termed a dictatorship of the majority simply didn’t exist in the body of prevailing law until FDR began pulling the levers.

Since that time, things have gotten steadily worse until the point that Americans now sit on their hands while the government rounds people up and holds them without trial, or invades other countries on false pretenses, then continues the farce at the cost of trillions of dollars. Then there is the federal takeover of one large swath of the economy after the next.

Put another way, at this point the slope has been well greased for government to do pretty much anything it wants… all in the name of the greater good. With that being the case, all that’s needed now for things to get really ugly is the right impetus.

I suspect that won’t be long in coming. Whether it’s war with Iran, now made all but inevitable by the U.S.-led sanctions preventing key commodities from reaching the citizenry… or the next leg down in the eurozone, followed by a loss in faith by bond traders about the similarly dismal outlook for Japanese and U.S. finances, we are approaching a tipping point.

Which brings us back to the lack of debate about rational approaches out of this crisis referenced by Ferguson. Unless and until that debate is well joined, you must take it as a given that things are only going to get worse from here. And then they are going to get really bad.

Maybe so bad that the push by some in the environmental community to toss over key concepts of democracy could come to pass. Of course, for them to promote this idea is naïve to the extreme, because in the dictatorship that follows, the environmentalists would likely be the first up against the wall.

On this general topic, this week we continue with short video clips of my dear partner Doug Casey excerpted from The Fall of America video series. In today’s installment, Doug discusses some of the worst of what he believes is to come.
Watch it here

Then, if you so desire, you can learn more about the entire high-quality, 9-disc video series by clicking here.

End Notes

I’d like to close for the day by stressing our view that we’re on the edge of an economic precipice.

As explained in this month’s edition of The Casey Report, published last night, this next leg down will likely take pretty much everything down with it, including most commodities and even the precious metals. That said, we see any downdraft in the precious metals, and especially gold, to be short lived and nothing to worry about. Which is to say, if you are looking to add positions, you can view any continued setback as good news. Gold stocks are also likely to come under pressure, but, again, as people remember those securities are attached to gold, they’ll do just fine.

Continuing for a moment on this topic, over the weekend I spent time with a friend who is a very highly placed Wall Street exec and over the course of our discussion learned that he and his colleagues concur with our view that things are about to get ugly. You could call him a reluctant bear because, as he correctly points out, it’s a lot harder making money in a bad market. The idea at this point is more about not losing, so don’t be afraid to hold some extra cash in here.

Finally, for today, we received a number of emails from dear readers complaining about our man in Washington, Don Grove, using the phrase “right-wing nuts” in conjunction with a mention of Rush Limbaugh and Glenn Beck. This was a misunderstanding, a case of Don trying to be sarcastic, which is why he used quotation marks around the phrase. Don is on the record as a fan of Limbaugh and Beck.

Speaking personally, while I think Limbaugh has shown himself to be fully human and a hypocrite by calling for the death penalty for drug users while being an addict himself and Beck tends to go a bit overboard, they bring a lot of value to the policy debate in this country. That they are so vilified by the socialist/populists is a direct result of the fact that their views resonate so strongly with people who stand in opposition to the current leadership.

While I consider myself more of a libertarian with anarchist leanings than a conservative, economically I’m on the same page as Limbaugh and Beck. In the final analysis, however like all their peers in the talk show community these guys are mostly just media personalities pulling a paycheck, so one shouldn’t take them overly seriously.
And with that, and with my apologies if I have further offended anyone, I will sign off for the day.

Until tomorrow, thank you for reading and for being a subscriber to a Casey Research service. On that topic of subscribing, I’ll leave off by mentioning we are still offering three-month, no-risk trials to The Casey Report, in case you’d like to view the current edition for yourself. Love it, or get your money back. Details here.

David Galland
Managing Director
Casey Research

Daily Dispatch: Why Have the Jobs Gone Away?

July 06, 2010 | Why Have the Jobs Gone Away?

Dear Reader,

Chris here. If you’re from the U.S., I hope you had a wonderful 4th of July weekend. If you’re from a foreign land, I hope your weekend was equally pleasant. For me, I spent my weekend at home cleaning. As a thirty-something bachelor, I sometimes overlook things like vacuuming, mopping, dusting, and doing dishes. But my parents are arriving tomorrow, and I didn’t want them to see their son living like a pig (even though I’m quite certain my father would if my mom weren’t around). Truth be told, thanks to how hot it was this weekend where I live, I didn’t accomplish close to what I set out to do, and I’m nowhere near finished making my home presentable. But hopefully I can knock it out tonight.

Okay, enough chit chat, now down to business.

Why Have the Jobs Gone Away?

It’s no secret that the private sector in the U.S. has been shedding jobs at an alarming rate, while the public sector has grown fat milking the production of the private sector. Just look at the chart below showing the most recent data from the Bureau of Labor Statistics on private employment (from January 2008 through June 2010) compared to the chart on federal government employment for the same period.

Since January of 2008, the private sector has shed 7.9 million jobs, reflecting a decline of 6.8% in total private employment over the past 30 months, while the federal government has added 469,000 jobs, indicating an increase of 17.1% over the same period.
But this stark contrast says nothing about why the jobs have disappeared. On this subject, I just came across a write-up by the blog The Economic Collapse that I largely agree with, so I’ll provide some excerpts below.… Yes, the large global corporations have been sending millions of jobs overseas where labor is far, far cheaper. And yes, the U.S. government has accumulated so much debt that it is absolutely suffocating the U.S. economy.
But there is another very important factor that has been largely overlooked. Traditionally, about 75 percent of all new jobs are created by small businesses. But today, hundreds of thousands of small businesses are being strangled out of existence by all of the oppressive taxes, fees, rules, regulations, paperwork and demands that government keeps imposing on them. In such a repressive environment, it is getting close to impossible for small businesses to thrive, and if our small businesses can’t succeed, then we simply are not going to see a lot of jobs being created.

You see, the truth is that over the past several decades the game has become dramatically stacked in favor of large businesses. Big corporations have the money to lobby Congress and other governmental institutions, they get almost all the tax breaks and they are the only ones who get bailouts. They even “help” write legislation on the federal level.

Many times large corporations will even lobby for more regulations for their own industry because they know that they can handle all of the rules and paperwork far easier than their smaller competitors can. After all, a large corporation with an accounting department can easily handle filling out a few thousand more forms, but for a small business with only a handful of employees that kind of paperwork is a major logistical nightmare.

When it comes to hiring new employees, the federal government has made the process so complicated and so expensive for small businesses that it is hardly worth it anymore. Things have gotten so bad that more small businesses than ever are only hiring part-time workers or independent contractors.
So what we actually have now is a situation where small businesses have lots of incentives not to hire more workers, and if they really do need some extra help the rules make it much more profitable to do whatever you can to keep from bringing people on as full-time employees.
Yes, all big corporations today started out small. But, in general, they got their start in a much friendlier regulatory environment than exists today. And the point is that as long as the deck is stacked so strongly against small businesses competing and expanding, the U.S. economy cannot thrive and jobs won’t be created, they’ll continue to be lost.

Signs of the Times…

Here are some random stories that speak volumes about the times we live in.
The U.S. government is spending 2.6 million tax dollars to study the drinking habits of Chinese prostitutes and another $400,000 to study gay sexual behavior in Argentine bars (yes, bars in Argentina). Link here.
U.S. officials say that more than $3 billion in cash (much of it aid money paid for by U.S. taxpayers) has been stolen by corrupt officials in Afghanistan and flown out of Kabul International Airport in recent years. Link here.
Researchers at the State University of New York at Buffalo received $389,000 from the U.S. government to pay 100 residents of Buffalo $45 each to record how much malt liquor they drink and how much pot they smoke each day. Link here.
It’s reported that a 6-year-old girl from Ohio is on the “no fly” list maintained by U.S. Homeland Security. Link here.
Oh yeah, and the average federal worker now earns about twice as much as the average worker in the private sector.

If stories like these are becoming too commonplace in your view and expatriation is looking like a better and better option each day, you might want to check out this article that deals with the 7 most common excuses against expatriation.
Also, we just released a new special report titled American Expatriation Guide: How to Divorce the U.S. Government. While each individual’s situation is unique and you should always consult a legal professional concerning the specifics of your choice to part ways with the U.S., this report will answer many of your questions on the topic. Download the free report here.

Time to Board the Gold Stocks Train?
By Jeff Clark, Casey’s Gold & Resource Report

One of the big hints that gold stocks will be ready for take-off is when they stop following the broader markets and strictly track gold, particularly if the market falls and gold stocks don’t. We now have data showing this has just occurred.

From April 2009 to April 2010, gold stocks mirrored the S&P. The two markets held hands as often as high school sweethearts; there was very little separation between them. While it wasn’t always a daily connection, any weekly and especially monthly chart showed them moving in tandem.

Until now.

For the quarterly period of April through June, gold stocks advanced 11%, tracking gold’s gain of 10.7%. The S&P, however, lost 14.1%.

We haven’t seen this level of separation between gold stocks and the general stock market since the first quarter of 2010. This demonstrates obvious strength in our sector, and is precisely the kind of action that can signal we’re getting closer to our precious metals investments starting a major leg up.

In the big picture, this data should be considered a short-term indicator. However, it’s a refreshing reminder that at some point, it won’t matter what the broader markets are doing. In the precious metals bull market of the 1970s, the Barron’s Gold Mining Index soared 652%, while the S&P gained only 22% for the entire decade. This means that if you’re bearish on the economy, you don’t have to be bearish on gold stocks.

Whether this is the beginning of permanent separation or not, the following chart tells us the stock market, in relation to gold, is going one direction.

At gold’s bottom in April 2001, the Dow/Gold ratio (DJIA divided by gold price) was 41.2. It now stands at 7.9 (as of July 2).

When gold peaked in January 1980, the Dow/Gold ratio reached “one,” meaning they were both selling for about the same price. To hit that same ratio today, gold will have to go higher and the Dow simultaneously lower. The fundamental reasons gold will rise are far from over, and a second leg down in the broader markets seems almost locked in at this point.

In this context, Doug Casey’s call for a $5,000 gold price doesn’t seem so farfetched. It also coincides with his call for a Greater Depression, an environment not exactly suited for higher stock prices. $5,000 gold = 5,000 Dow.

Where do you think they’ll meet three? Eight?

This has obvious implications for your investments. If you’re investing for the big picture, you first want to think twice about any conventional stock investment. You might even consider a short position on one of the indices, something without a time limit, such as an inverse ETF.

Second, you should plan on higher gold prices. While pullbacks are inevitable, it does mean that even if you don’t own gold yet, it’s not too late. In fact, any excuse you have now for not buying gold will seem shallow and meaningless when the dollar begins cratering and so does your standard of living.

Third, don’t shy away from gold stocks. Yes, they’re still stocks and thus vulnerable, and we’re not sure the separation is here to stay, but selling your core holdings would be, in my opinion, a mistake. One of these days gold stocks won’t wait around for you to jump back in. And you could find yourself chasing them, a tactical error for the investor looking to maximize profit from what we believe will be a once-in-a-generation bull market.

In fact, if you had followed only this strategy since the precious metals bull market began in April 2001, you’d be up 375% in your gold holdings and up 707% in your gold stocks. An investment in the S&P, meanwhile, would’ve returned you exactly zero.

It’s our opinion this trend will continue. Gold stocks could very well get cheaper in the short term, handing us an excellent buying opportunity. But in the big picture, they’re destined for much higher levels.

My advice is to make sure you’re on the right side of this trend.

What’s a good price on gold, silver, and precious metals stocks? We’ve charted every summer pullback in prices since the bull market began in 2001, giving us target zones for every asset in our portfolio. Our Summer Buying Guide is an invaluable resource for identifying a good bargain in our industry. And you can access it right now, for $39 per year, with a risk-free 3-month trial. Click here for more.

Why Green?
By Vedran Vuk

What do the War on Terror, green energy, and the high-speed rail project have in common? They all lack clear objectives and success measurements. These three initiatives are perfect for politicians. When there is a clear benchmark, government gets into trouble. For this reason, politicians more and more avoid quantifiable projects such as unemployment, poverty, income, etc. Or they set arbitrary benchmarks. For example, universal healthcare aims to insure the entire population. I have no doubt that the government can insure everyone. However, I have very strong reservations about long-term affordability and quality. Of course, the Democrats realize this too. That’s why they focused on the number of uninsured rather than price and quality. They know that they will fail on price and quality.

The wars in the Middle East are also unquantifiable goals. Are we winning or losing in Iraq and Afghanistan? It’s impossible to say. At best, one can have an educated opinion, but an objective statement eludes both sides of the issue. Occasionally, the government attempts to quantify success by demonstrating lower casualty rates. But even these statistics are worthless and deceptive. Victory more often than not comes with higher casualties not fewer. Further, it’s impossible to say with certainty whether there would be more or less terrorist attacks without the wars.

Sooner or later, we’ll have to exit the Middle East. However, the unquantifiable century-long goal will be green energy and the green movement. Will green energy ever be more profitable than oil, coal, and gas? Let me put it this way: Green energy is little more than modern-day alchemy. Today, oil is the gold, and the wind farm is the lead. There are plenty of good uses for lead, but ultimately it will never become gold.

Because environmental goals cannot be quantified, the government will keep pushing them for eternity. There’s no way to account for cleaner air in a cost/benefit analysis that’s why the government loves green. Just ask yourself, what should society pay for 10% cleaner air? You could pick any number. No matter the outcome, the government can always claim success. Those pesky cost/benefit approaches won’t bother them here.
Emissions are already following this model. Goals are set to reduce emissions by arbitrary percentages, but the quantifiable benefits are never revealed. Further, the percentages themselves appear to be arbitrarily picked out of thin air. Though the benefits are unaccountable, the government can keep claiming that it’s “saving the planet.” What does it actually mean to cut emissions by, say, 30%? Where’s the benefit outside the catch phrases of a “cleaner and greener world”? The benefits are always left vague, generalized, and idealized with a touch of apocalyptic overtone.

The new high-speed rail project campaigns focus on the environmental benefits and the improved livability of communities. $8 billion is being spent on these projects around the country, with $2.25 billion for California alone. How does one calculate success in creating a “livable community”? Ultimately, “livable” is a subjective term. And that’s exactly why the government has adopted this as a goal. Even if the project is a complete money pit, they can always claim to have created more “livable” neighborhoods.

Then there’s the green angle that promises to reduce pollution. Sure, maybe the air will be a bit cleaner. But is this worth $8 billion? Once again, it’s impossible to say and that’s the whole point.

If society actually valued high-speed rail, a system would have been constructed long ago. When consumers demand a product, entrepreneurs will be more than happy to provide it. If the costs are greater than the consumers’ willingness to pay, then the project will fail or will never even start. The very fact that a private high-speed rail does not exist says everything that you need to know about the cost/benefit analysis here. Only unquantifiable goals can justify the project. Hence, these are the goals centerstage.
But don’t worry. The high-speed rail will be a success just like the Iraq war, just like green energy, and just like universal healthcare. When there are no quantifiable goals and only arbitrary benchmarks, every government project is a winner.

And That’s It for Today

Chris again. Before signing off, I would like to point to a recent article in The New York Times that lays out Robert Prechter’s (founder and president of Elliott Wave International) market forecast. Prechter is convinced that we have entered a market decline of staggering proportions. He says the Dow is likely to fall well below 1,000 (no typo, that’s one thousand) over perhaps five or six years as a grand market cycle comes to an end. Link here.

Although I’m skeptical about many technical approaches to market analysis, Prechter’s version of the Elliott Wave theory has brought him and his company much success over the years, so it might not be wise to discount his approach completely off hand. Still, as bad as I think things are going to be over the next few years, I have a really hard time believing the Dow could fall below 1,000 simply because of all the money that has been and will continue to be pumped into the system. Furthermore, once the inflation expectation catches hold, the velocity of money will ramp up as people eagerly trade their dollars for something more tangible. Insofar as pieces of blue chip companies that actually produce things and are capable of creating wealth represent something “more tangible” than fiat currencies, the rush could actually push the Dow up in nominal terms.

Even so, in real terms, the money pumping we’re seeing today and will continue to see will (due to the malinvestment it has caused and will cause) destroy much wealth in the years to come, and people’s average standard of living will decline significantly.
And that, dear reader, is that for today. As always, thank you for reading and for subscribing to a Casey Research service.

Chris Wood
Casey Research, LLC